Tag Archives: finance

Revenge on the Street – J.P. Morgan Fined for Bernie Madoff’s Ponzi Scheme

J.P. Morgan can’t seem to catch a break lately as on December 12th (yes I know I’m late), the banking giant was charged $2 billion for ignoring red flags related to Bernie Madoff’s Ponzi scheme. To understand this story, we have to go back several years.

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This is Bernie Madoff, the villain behind the whole debacle. In 1960, Madoff founded Bernard L. Madoff Invesment Securities, a wealth management firm. Over the decades, he gained the reputation of being a spectacular money manager as he consistently generated highly successful returns for his investors. However, as the 2008 financial crisis loomed over the markets, it turned out that Madoff’s entire firm was a fraud, a fake, as fake as this Chinese rip off of Apple.

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You see, Madoff was running something called a Ponzi scheme. A Ponzi scheme occurs when a wealth manager gathers money from a group of investors and funnels it to other investors but says that they are the returns he earned from his investing strategies. In reality, there is no fancy trading strategy. Its all just one giant loop and it relies on a continous flow of funds. If investors stop giving or demand their money back, then the scheme falls apart. But with his wit and charm, Madoff kept this scheme afloat for decades. He built relationships with the most powerful and influential figures in the business world and convinced them to invest in his fund. Eventually he also attracted funds from less wealthy individuals and even various charity organizations.

Madoff’s investors were extremely pleased with Madoff’s consistent returns. Even during the periods when the market was on the decline, Madoff’s firm generated positive returns. However, this eventually drew the attention of other investing specialists on Wall Street. Madoff’s investing strategy revolved around buying large-cap firms such as Coke and AT&T and also purchasing options in those stocks as well. Ideally, this strategy should have limited the portfolio’s volatility. Nevertheless, his portfolio should still have been correlated with the market. However, Madoff even made positive returns in times when the market was falling. In the early 2000s, several other investors brought the issue up to the Securities and Exchange Comisssion, the regulatory body that governs the financial sector. However, their pleas were to no avail.

The house of cards collapsed in 2008. As the financial crisis caused the economy to plummet, a large group of investors wanted their money back. Due to the nature of the Ponzi scheme, Madoff did not have enough money on hand and was unable to repay his investors. Eventually, he confessed to his crimes and was brought into custody by the FBI and charged with 150 years in prison.

Jamie Dimon

Well what does this all have to do with J.P. Morgan then? Bernie Madoff operated his wealth management firm through J.P. Morgan. 4 years after Madoff’s imprisonment, J.P. Morgan agreed to settle for a fine of $2 billion following allegations by federal prosecutors that the the bank had ignored various red flags regarding Madoff’s operations. Madoff opreated out of J.P Morgan for roughly 15 years. I don’t know how deep bank’s usually track the activities of their clients but I just got my debit card cancelled for a possible suspicious activity when I hadn’t even used it in over 6 months. My guess is that in 15 years, a couple of hints may have dropped on a desk somewhere in the J.P. Morgan office. Of course, as I covered on this segment before, J.P. Morgan is looking to settle all its legal issues and be done with them once and for all. Thus, it is possible that they might have just accepted to settle case even though they could have pooled their resources to summon enough evidence to prove them innocent.

Its always nice to see crime pay. But its a tragedy that the crime wasn’t detected earlier. If you leave aside the millionaires and billionaires, a lot hardworking people and charities trusted their money in Madoff’s hands. Its heartbreaking to hear about their life’s savings vanish over night. If you’re interested, this 45 minute documentary regarding the scandal contains interviews with various people who had to come out of retirement and start working again at an old age because they lost their savings thanks to Madoff. Though certain regulations can be tedious and disruptive to business, I’m all in favor for regulations that makes it easier to catch any future similar cases that could hurt so many innocent people.

“In today’s regulatory environment, its virtually impossible to violate the rules”
-Bernie Madoff

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Upcoming Emerging Market Elections

The geopolitical stage is typically divided into two camps: the Developed Markets (such as USA, the EU, Japan, England) and the Emerging Markets (such as China, Russia, Brazil, India, Turkey). Developed Markets are countries that have stable financial markets and political systems. Their economies are powerful but have developed to the point where they can now only grow at a slow and steady pace. On the other hand, Emerging Markets are the new players on the global stage. Their economies have grown rapidly over the past several years and they appear to have promising futures. However, their financial systems still need improvement and their political systems are still unstable. If the two groups could be visualized as Hollywood actors, the Developed Markets would be Liam Neeson.

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No matter what movie it is, you know for a fact that if Liam Neeson is in it, he is going to dominate that role and he is going to be a total badass as he trains Batman, saves his daughter, releases the Kraken, etc. Much like Liam Neeson, Developed Markets shape the context of the globe and have established themselves as the leaders of the world. On the other hand, Emerging Markets are James Franco.

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You can tell James has a lot of potential. He’s had some great movies such as 127 Hours, the Spiderman series and Pineapple Express. But let’s be honest, he’s been in some lousy movies too. Have you seen Your Highness? No you haven’t; and neither has anyone else. So you know Franco is a great actor but you can’t tell if his next movie is going to break box office records or totally fall flat and bomb. Similar to Franco, Emerging Markets have potential and may even become one of the world’s leading nations in the future. However, they are unstable and have their internal problems, much like Franco’s problem to keep his eyes fully open.

After the financial crisis of 2008, Developed Markets suffered greatly. Their economies were in shambles. These nations responded by lowering interest rates to stimulate demand. Thus, investors moved their money to Emerging Markets to seek higher returns on higher interest rates. After 2009, Emerging Market economies skyrocketed. From 2010 to the end of 2011, most Emerging Market economies grew somewhere between 6-11%. For example, in 2011, the Chinese economy grew by 9.2% and the Turkish economy grew by 8.5%. Following these developments, everyone believed that the time of Emerging Markets had come and that they would lead the world out from pits of the financial crisis.

However, in 2013, as central banks around the world such as the FED started talking of taking their foot of the pedal and slowing their support of their economies, interest rates rose in the developed world. 2013 was also the year when political upheaval broke out in certain Emerging Market countries, the US economy continued to recover at a steady pace and the EU saw the worst of its crisis pass. All of these factors caused investors to put their money back into the Developed Markets. As the cheap money was pulled away from Emerging Markets, their economies slowed down and their currencies lost value against Developed Market currencies.

In case you don’t believe me, here is a finance professor from George Washington University discussing how Emerging Markets fared in 2013.

Now in 2014, many Emerging Markets will go to the polls and determine their leaders in elections. These elections will shape the political sphere in those nations for the next several years and will definitely effect not only their national economies but ultimately the global economy. So, along with a graphic from the Wall Street Journal, here is a breakdown of upcoming Emerging Market elections in 2014.

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Brazil

Brazil’s economy is highly dependent on commodity exports. Thus, a fall in commodity prices, excessive government spending and a social upheaval against the government in the summer all proved troublesome for the Brazilian economy. The general election in October will decide if President Dilma retains her position or replaced by the opposition.

South Africa

In South Africa, the African National Congress party has won every election after the apartheid era. But they are now being challenged by the Democratic Alliance which won 16% of the votes in the 2009 elections and has grown in popularity ever since. Come election time in April, the ANC’s hegemony over South African politics may come to an end.

Turkey

Recep Tayyip Erdogan and his AK Party have dominated every local and national election since they first came to office in 2002. During their term in power, they have further liberalized and grown the Turkish economy and have also increased Turkey’s influence on the global stage. However, resentment against Erdogan’s authoritarian tendencies and his party’s encroachment on personal freedoms exploded this year during the nationwide Gezi Park protests. Furthermore, a recent corruption scandal charged against several AK ministers have led to their resignation and has made the AK Party lose even more of its influence. The AK Party is still highly popular throughout Turkey, but it will be interesting to see the effect of recent events on the local elections in March.

India

The Indian economy currently faces stagflation as it is stuck in a state of high inflation and below average growth. Incumbent president Manmohan Singh has stated that even if his United Progressive Alliance party wins, he will not be president for a third term. Investors are hoping for a victory by pro-reformist Bharatiya Janata Party. Only time will tell the outcome of the general elections in May.

Indonesia

In July, whoever wins the Indonesian general election to replace outgoing two-term president Susilo Bambang Yudhoyono will have a full plate. Growth has slowed, politically popular fuel subsidies are draining the treasury and corruption remains rife.

All of these countries require the implementation of unpopular but important reforms to aid their economies and remedy social issues. However, because of upcoming elections, ruling parties are unfortunately likely to delay these reforms till after the elections are over.

“Emerging markets are hugely important.”
-James Dyson

New iPhones Unveiled – Has Apple Peaked?

On September 10th, Apple unveiled two new iPhones, the iPhone 5C and the iPhone 5S. Another year, another new iPhone, and another chance for me to share this classic Futurama clip.

Both iPhones will be available in the United States starting September 20th. This announcement had been expected for quite some time now. Over the past year or two, Apple had been facing several troubles.

1) It has lost the majority in the smartphone market share to Samsung. Though Apple is extremely dominant in the United States, Samsung, integrated with Google’s Android operating system, is outselling Apple in the rest of the world thanks to its cheaper prices.
2) Its earnings have dropped. Yes Apple’s products still have a very high profit margin and the company’s overall earnings are relatively high, but this year, the company reported its first decrease in earnings since 2003. As evidenced by the following graph provided by Yahoo Finance, this caused the price of Apple’s stock to decrease from above $700 in September of 2012 to a low of less than $400 in April 2013 (Apple’s current share price is at $467). The drop in price eroded almost $57 billion of market capitalization.

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The expectation was that Apple would release a much cheaper iPhone, so as to sell more units in emerging markets such as China and India, where Apple is being outsold by firms that produce cheaper smartphones. China and India are the two most populous countries in the world with a total of over two billion people. Additionally, China is the 2nd largest economy in the world and India is the 10th largest economy in the world. The cheaper iPhone would have given Apple deeper penetration into these markets and would have allowed Apple to recapture the majority of the global smartphone market share, not to mention boost profits. What we got was the iPhone 5S and iPhone 5C.

The iPhone 5S is a more developed version of the current iPhone 5. Its most buzz creating features include its ability to allow the user to secure their phone with fingerprint recognition, noteworthy advancements made on the camera, a faster processing speed, and additional features added to Apple Maps and Siri. A side note on the faster processing speed. How much faster can phones get? Seriously! It already takes a mere second or two to run any application. If that’s what draws you to drop $500-$600 on a new phone, you are insanely impatient. I digress.

Apart from a few minor upgrades, the iPhone 5C on the other hand is extremely similar to the iPhone5. This is what was supposed to be the ‘cheap iPhone’. However, with its price, Apple revealed that they are not willing to give up their position as the premium seller in the market. The entry level iPhone 5C without a contract will be roughly 599 Euros in Europe, 4488 Renminbi in China and 35,000 Rupees in India. Those are still pretty high prices for those countries. Even though wages have risen in China over the past few years, they are still much lower when compared to developed nations. It is much more sensible for an Indian or Chinese individual to buy a cheaper lower-end smartphone.

The question is, will these new series of products (and the newly revealed ios 7 operating system) bring Apple back to its former glory? There isn’t much doubt that Apple’s new series of products will mend its short term concerns. The cheaper iPhone will help sell more units in emerging markets even if less than expected. It is also crucial to note that Apple is on the verge of hammering out a deal with China mobile, a Chinese mobile network provider that services 700 million users. Penetrating that customer base of 700 million will be a huge win for Apple.  Again, the new products will surely bring excitement to Apple and boost the firm’s profits as well. However, if we look at Apple in the long run, it is possible to say that Apple has peaked. For the moment being, the company is no longer an innovator, but an emulator. This is to be expected. In any economic situation, when one party supplies a scarce product or service, they will be profitable and will be able to charge higher prices. That was the situation when Apple first entered and formed the smartphone market. But as supply increases relative to demand and the product/service becomes less care, the company most focus on keeping up with the competition (eg. Samsung, Nokia/Microsoft, HTC).

Of course we don’t know what crazy projects Apple has got brewing deep inside their headquarters. I expect them to develop something similar to Samsung’s recently released smartwatch. There are also rumors of Apple being in the process of developing a television. I’m not saying that Apple is dead or that Apple’s days are coming to an end. The company is founded and run by innovators and visionaries. But competition is no longer idle, and unless Apple leads the way into a new revolutionary market, its highest point is behind us.

To end this post, here’s a little tip for all you investors out there. Don’t assume that the hype created by Apple’s product announcements equate to a massive spike in share prices. The following graph assembled by Bloomberg shows that after Apple’s past product releases, Apple’s share price either stayed stable or dropped in the short term. Play it safe for now.

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“You have to be burning with an idea, or a problem, or a wrong that you want to right. If you’re not passionate enough from the start, you’ll never stick it out”
-Steve Jobs

Journey to Symmetry

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Asymmetric Information is the economic theory (developed by George Akerlof, Michael Spence, and Joseph Stiglitz) which states that in transactions, when one party has superior information than the other, an imbalance of power is created, which can eventually lead to market failures.

This condition is apparent in many instances throughout society. It occurs when you’re unsure about the quality of a used item on Craigslist or when an insurance company decides to insure an individual but is unable to determine what medical conditions he/she really has.

However, I think the most important instance of asymmetric information is the way our world runs. Everyday, crucial economic, financial, and political decisions are made all around the world and because of how integrated our world has become in this age of rapid globalization, all of those decisions end up affecting our lives in many ways. The interest rates on our college loans, the price we pay to fill up our car with gas, and the amount of money taken away from our paycheck for taxes are just a few examples of things that are decided by a few people in different corners of the globe but that have an impact on our everyday lives. These decision makers have an immense amount of knowledge on these issues while many of us idly accept the fact that we will never understand them, thus leading to asymmetric information. This is one of the reasons why most of the world’s wealth is owned by 1% of the world’s population. If more of us were more educated and informed regarding these issues, not only would we learn more about the world around us, but we would also make better decisions in our lives.

The main two reasons why the average person doesn’t take it upon himself to engage himself in this material is that he/she is either uninterested or unable to learn. This is where I come in. I’m just a 23 year old college graduate and thus I don’t claim to be a guru in all political and financial issues. However, I have studied them extensively for the last 5 years and I regularly follow these events on a daily basis. I decided to start this blog so as to help others become more educated and well-versed regarding political, financial, and technological subjects and events. After explaining the content I discuss in my writings, I will end my articles with my own opinion regarding the issues. That way, I will attempt to separate the facts from my own opinions. If you have any comments or questions, feel free to contribute. But please keep it clean. If you would like to contribute an article, please email me your writing at yegenugur@gmail.com. I’m always glad to have contributors join me on this blog. With easy to understand explanations, links to educational sites, visual aids, and with a sensible dose of humor and wit, I believe I can do my small part in attempting to overturn the status-quo, and end information asymmetry.

“We make the rules pal. The news, war, peace, famine and upheaval, the price of a paper clip. We pick that rabbit out of a hat and everyone else sits out there wondering how the hell we did it.”

-Gordon Gekko